In recent years we have witnessed a substantial convergence
of research interest and the opening of a debate
on the economic role of market competition in
the banking industry. The need for such a debate may
seem unjustified at first. The common wisdom would
hold that restraining competitive forces should unequivocally
produce welfare losses. Banks with monopoly
power would exercise their ability to extract rents by
charging higher loan interest rates to businesses and
by paying a lower rate of return to depositors. Higher
lending rates would distort entrepreneurial incentives
toward the undertaking of excessively risky projects,
thus weakening the stability of credit markets and
increasing the likelihood of systemic failure. Higher
lending rates would also limit firms. investment in
research and development, thus slowing down the
pace of technological innovation and productivity
growth. Lower supply of loanable funds, associated
with higher lending rates, should also be reflected in
a slower process of capital accumulation and, therefore,
in a lack of convergence to the highest levels
of income per capita.